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James M. Thomas, CFP®

New Overtime Rules Could Be Costly for Small Businesses

When the U.S. Department of Labor (DOL) finalized its changes to the Fair Labor Standards Act (FLSA) overtime rules in May 2016, the minimum salary for exempt workers more than doubled — from $23,660 to $47,476. It’s estimated that 4.2 million more U.S. workers could become eligible for overtime pay when the rules take effect on December 1, 2016.1

The intention is to raise the wages of low-salaried workers who are working more than 40 hours a week — or to give them more free time. But expanding access to overtime protections could hurt some employees and small businesses.

Employers of all sizes may need to review their existing employee classifications and evaluate different staffing options as they attempt to comply with the new rules, balance budgets, and retain top talent.

Who Is Exempt
Federal overtime rules require that employers pay eligible non-exempt employees at least 1.5 times their regular rate of pay when they work more than 40 hours in a week. Employees may be classified as exempt from overtime if they are paid a minimum salary and hold a position with certain duties designated by the DOL. These “white collar” positions include executive, administrative, professional, computer, outside sales, and some highly compensated workers. Exempt employees don’t have to punch a clock or track hours.

Tough Choices
Restaurants, retail stores, nonprofits (including colleges), and small businesses often have employees whose salaries fall under the new overtime exemption threshold, such as low- to mid-level managers. Affected businesses have several options to consider.

Keep the employee’s exempt status by raising his or her salary to the threshold. The pay raise could come with additional duties and responsibilities.

Transition the employee to non-exempt status at the same salary and keep track of the hours worked. Cap weekly hours at 40, but be prepared to pay the required rate for overtime when it is necessary.

Change the employee’s status from exempt to non-exempt with hourly pay at a comparable rate. In some cases, this could limit the job flexibility that is often appreciated by salaried workers, damaging morale.

Many businesses may have to raise prices or make difficult decisions about their workforces to offset rising labor costs. Some would need to update recordkeeping procedures to ensure full compliance. Employers who consider the potential impact of the new rules on the business’s financial picture may be in a better position to take action.

Update: On November 22, a federal judge issued a nationwide injunction preventing the new overtime rules from taking effect on December 1, 2016. Pending further litigation or Congressional action, however, some form of the overtime rule could eventually be implemented. Some employers have already made adjustments to their payrolls, but for others, it may be wise to wait and watch this issue closely until a final decision is reached.

1) U.S. Department of Labor, 2016

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2016 Emerald Connect, LLC